Research Paper: Structure Constrains Growth Bounded Rational Choice

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Structure Constrains Growth

Bounded Rational Choice

"It seems safe to assume that decisions on organizational form are made by comparing the performance of alternative forms and choosing the one best suited to each specific situation," Arru-ada and Vazquez assert (2002, p. 3). This is complicated however, by the fact that observers can only quantify the form deployed and not the results of foregone alternatives. They reviewed the "ample" (Arru-ada and Vazquez 2002, p. 2) literature on organizational choice at that time and found specific weaknesses, including contradicting results studying performance of franchises (horizontal) compared to company-owned (vertical) modularity in different industries. Thus they found limited determination between organizational structure and performance measures for various reasons, resulting from differences in incentive structures within the studied firms, or "some unobserved heterogeneity across agents that is also affecting the choice of organizational form" (Arru-ada and Vazquez, 2002, p. 2). Their primary research found contradicting results in auto markets between owned and contracted organizational forms based on differing incentives between the two types of agents, managers and owners, because owners retain the residual and thus have stronger incentive to performance compared to managers (Arru-ada and Vazquez, 2002, p.3).

On the other hand franchisees had stronger incentive to forego quality, especially where competition was absent, there due to exclusive territory granted by the manfuacturer (Arru-ada and Vazquez, 2002, p.4). Monopoly, in this case artificial, reduced competition and created moral hazard driving horizontal units to avoid cost through lower quality in Spanish auto markets. This illustrates principles that generalize outside Spain and the auto industry. Many other researchers try to identify the components of these costs, which are complicated by variability across product markets, level of competition, and an effectively infinite series of localized environmental factors revealed through a vast body of research. Arru-ada and Vazquez (2002) specifically considered incentives to agent effort (moral hazard) between owners and managers, measured by sticker price, market size and service quality; various incremental costs were affected by free-rider incentives, information search cost and manufacturer moral hazard (incentive to shirk goes both directions), and unspecified risk (p. 8). Later they described how most of the literature considers technological and institutional change as placeholders for specific environmental factors that change with effects on organizational choice (Arru-ada and Vazquez, 2002, p.14). These effects are not so easily dismissed in other industries.

Lamb, King and Kling (2003) for example described how high-tech, institutionalized environments generate higher utility from greater information than do "low-tech, unregulated industries" (p. 97). They described how information science studies generally had considered organizational information gathering through rational choice, closed-system interactionist and more recently, open-systems theories derived from extensive prior research (Lamb, King and Kling, 2003, p. 98), where agents gather information under three general motivations, to increase certainty and core knowledge, and reduce the stress of making decisions under uncertainty. The results, however, indicate that whether the agents actually use that information or not varies widely even though such information-gathering from the environment is essential (Lamb, King and Kling, 2003, pp. 99-100). Highly technical firms achieve process efficiency with endogenous information that translates into competitiveness, and where that market is institutionalized, the need for information is often driven by regulatory compliance, but also changing social preferences. All organizations face varying degrees of need derived from these two sources but the exact institutions and technological constraints vary across environments. These driving factors become "amplified and attenuated through interorganizational relationships that are shaped by industry environments" (Lamb, King and Kling, 2003, p. 100).

The result is that environmental forces drive information search more strongly than decisions or agent preference within the firm (Lamb, King and Kling, 2003, p. 99-102). They set out a laundry list of reasons they selected to investigate across different firms, that determined information search regarding other actors in the industry and institutional environments, including compliance; profiling other entities, competitors and markets and then their own analogous presentation; "customer expectation management," "information load shifting," and other general causes behind the inescapable demand for information (Lamb, King and Kling, 2003, p. 103). The utility of the results was constrained by endogenous decisions and the supply of data, but the resulting "interfirm coordinations shift data gathering incentives and activities across organizational and industry boundaries" (Lamb, King and Kling, 2003, p. 104, their emphasis), but in different measures within various industries and firms. What this reveals is not a list of specific factors comprehensively delineating how firms' organizational governance choice affects relations in the environment, but that different firms within an industry, and different industries interact with their environments, and change the information environments in systematic ways that transcend the boundaries of industry or organization. There is variation within and between groups, which feeds back and aggravates variation within and between groups, and within and between units in those sets.

Bloodgood and Morrow (2003) supported the multi-dimensionality of firm structure-environment interaction via a series of models from the literature in order to assess outcomes from choice of strategic processes following organizational change (p. 1761). They "introduce the aspects of environmental structure and internal conscious awareness into the establishment of strategic choice" in order to link "strategic choice and knowledge within the strategy formulation process" (Bloodgood and Morrow, 2003, p. 1761). After the usual list of dozens of influential contributions, and arguments for and against environmental determinism, they find that choice of organizational structure is "strongly influenced by the degree of conscious awareness of internal workings within an organization" (Bloodgood and Morrow, 2003, p. 1765). The difference derives from less choice which results in highly automated behavior, but the opposite entails higher degree of human agency. Lest this seem tautological, higher human agency is then determined by prior organizational experience and knowledge, where automatic response is not. Having many options leads to path dependence, where current change affects future options and past decisions are taken into account through organizational adaptation. Hence the degree of self-knowledge determines organizational strategic and thus structural decisions in a complex way analogous to individual human decision-making processes.

This is further restricted by "internal conditions that act to impose their will on the organization" (Bloodgood and Morrow, 2003, p. 1765), which constrain the amount or intensity of choice freedom. What Bloodgood and Morrow argue basically is that in high uncertainty and low endogenous resistance to adaptation, firms learn and adapt to external change, but where choice is highly deterministic, with high internal structural limitations, then strategic adaptation will also be reduced. This breaks down to tacit or explicit knowledge, depending on whether the information can be exchanged or not (Bloodgood and Morrow, 2003, p. 1766). The difference limits implementation of strategic initiatives like Total Quality Management just for example, in response to competitor action or environmental change, and thus varies within firms even within industries (Bloodgood and Morrow, 2003, p. 1774). What this variation in learning or path-dependence on strategic mobility implies, is an epistemological problem of how we know anything at all, or "knowing what we don't know," i.e. how information is acquired.

Leiblein (2003) describes an "unfortunate separation" (p. 938) between two main currents in the strategic management research, one focused on organizational governance and adaptation such as markets and hierarchy, and the other measuring increments within these wider classes. These streams focus on different increments and objectives, for example explaining efficiency in the first case vs. identifying and ranking particular resource and investment characteristics to derive sustainable competitive advantage (Leiblein, 2003, p. 938). The suboptimal result is that "recent research has demonstrated that the failure to integrate theories of organizational governance choice with theories of organizational governance form and performance may lead to misleading empirical findings" (Leiblein, 2003, p. 938). Leiblein then himself compares and contrasts transaction cost economics, resource-based analysis and Real Options frameworks for the effects of various governance models on value creation and its appropriation (idea theft).

These schema, while convergent, are based on various underlying assumptions of information cost, match between simple and complex forms and environmental articulation; contractual safeguards (property rights), opportunistic behavior and asset specificity, itself comprising six categories, along with other factors recognized above. Leiblein (2003) often found "fragile and at times contradictory results" (pp. 942-3) across the literature. Measurement uncertainty confounds even the simplest quantification at the level of worker productivity, for example (Leiblein, 2003, p. 943). Leiblein (2003) then lists dozens of studies that report such contradictory or indeterminate results. Future research to clarify and systematize these divergent findings includes defining opportunism; heterogeneity of resources, or "the conditions under which resources are and are not valuable" (Leiblein, 2003, p. 952); the role of uncertainty as compared to risk; and ultimately junctures of possible integration for these currently dispersed strands of inquiry. Leiblein's challenge toward convergence implies that uncertainty itself constrains our ability to describe uncertainty.

Other experts also find similar epistemological boundaries

Ethiraj and Levinthal (2004) used quantitative modeling of firm "evolvability" to inquire how the level of structural complexity determines performance of bounded rational design; if adaptation adds to or interferes with further change, and… [END OF PREVIEW]

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